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Chicago Bridge And Iron: A Great Company Selling For A Great Price

|About: Chicago Bridge & Iron Company (CBI), Includes: CAGR, COP, CVX, DOD, DUK, DWDP, EQNR, ETR, EXC, WMB, XOM
Summary

P/E and EV/EBITDA are 9.83 and 6.08 respectively.

Some of the biggest names in the investing community have been acquiring shares of Chicago Bridge and Iron.

I expect the shares to be trading north of $70 by 2016.

Summary

Chicago Bridge and Iron Company (NYSE:CBI), is a multinational conglomerate that specializes in engineering/construction projects for the oil and gas sector. CBI operates out of four segments: Engineering, construction and maintenance, fabrication services, technology, and government solutions.

Engineering, Construction, and Maintenance

This sector of CBI's business provides the EPC (engineering, procurement, and construction) which is where CBI would design the project they are hired to build, find the necessary materials needed to build the project, and then build the project. They provide EPC mainly to energy infrastructure facilities. The projects CBI works on are nuclear, fossil and renewable electric generating plants. They also provide maintenance services to these projects. The main customers are ExxonMobil (NYSE:XOM), Chevron (NYSE:CVX), Statoil (STO), Exelon (NYSE:EXC), Williams (NYSE:WMB), Duke Energy (NYSE:DUK), and Entergy (NYSE:ETR).

Fabrication Services

This business segment provides the making or fabrication of piping and piping systems, process and nuclear modules, and the production of storage tanks and pressure vessels for companies working in the oil and gas, petrochemical, water and wastewater, and mining industries. The main customers of this sector are CVX, ConocoPhillips (NYSE:COP), Dow Chemical (DOW), XOM, and Royal Dutch Shell (RDS-A).

Technology

The technology business provides the knowledge in the petrochemical facilities, oil refineries, coal gasification plants, and gas processing plants. The technology is licensed process technologies, catalysts, specialized equipment, and engineered products. This part of the business also offers to other businesses that, process planning, development services, and a wide-ranging program of aftermarket support.

Government Solutions

The last part of CBI's business is the government solution division. This part of CBI's business designs the infrastructure projects for federal, state and local governments all around the world. They also design and build amenities for marine and transportation projects. The clients comprise of U.S. Federal departments and agencies such as the U.S. Department of Energy (DOE), U.S. Department of Defense (NYSEARCA:DOD), U.S. Environmental Protection Agency (EPA) and the U.S. Federal Emergency Management Agency (FEMA).

Financials

The first thing that I like to look at when evaluating a business, is to see if that business has been able to grow the earnings for the shareholders. I will look at CBI's earnings for the past 10 years dating back to 2004.

 

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

Diluted EPS

5.37*

4.98

4.23

3.07

2.55

2.04

1.79

(0.22)

1.71

1.19

Growth Over Year Prior

14.4%

17.7%

37.8%

20.4%

25.0%

14.0%

NM

NM

43.7%

643.8%

*LTM 12 Months Mar-31-2015

From the above table we can observe that the earnings for CBI have increased overtime. The year of 2008 was the only year in which CBI posted negative earnings. Using a compounded annual growth rate formula (OTCPK:CAGR) we can see that the earnings have increased 16.26% annually. The consensus earnings for 2015 and 2016 are expected to be 5.70 and 5.59 respectively. I will briefly explain what happened to CBI in 2008 so we can get a clearer picture of why their earnings were negative.

2008 was right in the middle of the "Great" Recession. As we all know the Great Recession was the largest downturn in economic activity since the Great Depression. During 2008 there were a few losses due to projects over in the U.K. There were two U.K. projects that accumulated huge losses for CBI which accounted for a $457.00 million charge for CBI. CBI also went through an acquisition of ABB Lummus that also diluted the earnings for 2008. Finally gross profits were disparagingly impacted by higher cost of materials that were associated with higher construction costs. All of these charges against earnings plus the recession lead to CBI having a loss in 2008.

The next step that I do when evaluating a prospected company that I want to buy is look into the growth of revenue/EBITDA and margins of the company in the past.

 

2011

2012

2013

2014

2015*

Total Revenue

4,550

5,485

11,094

12,974

13,172

Growth Over Prior Period

24.9%

20.5%

102.3%

16.9%

11.9%

Gross Profit

570.2

698.7

1,199

1,466

1,535

Margin %

12.5%

12.7%

10.8%

11.3%

11.7%

EBITDA

416

514

934

1,176

1,254

Margin %

9.1%

9.4%

8.4%

9.1%

9.5%

EBIT

345

448

754

994

1,074

Margin %

7.6%

8.2%

6.8%

7.7%

8.2%

Earning From Cont. Ops.

255

317

512

636

690

Margin %

5.6%

5.8%

4.6%

4.9%

5.2%

Net Income

255

301

454

543

586

Margin %

5.6%

5.5%

4.1%

4.2%

4.5%

*LTM 12 Months Mar-31-2015, In Millions

The top line has been increasing over time by double digits. On the other hang gross margins and profit margins have decreased by almost a whole percentage point in the past five years. Revenue growth is a wonderful attribute to have in a business, but if revenue growth will continue to eat into profits, management may need to reevaluate its business. Currently CBI has a backlog of around $30 billion with a market cap of only 5.74 billion. What this suggests to me is that CBI is an undervalued equity. I am not the only one who thinks that CBI is a deal on the market right now.

Source: CapitalIQ

Some of the biggest top names in the investing community believe that CBI is a great business to hold onto. In under one year Greenlight Capital has acquired around 7 million shares of CBI. Berkshire Hathaway has held onto its ~10% position firmly and has not sold since the selloff last year. The next question is; is CBI still an undervalued business at today's price?

Currently CBI has a trailing P/E ratio of 9.83, and an EV/EBITDA ratio of 6.08. CBI's ROI, ROA, ROC and ROCE in 2014 were; 6.6%, 13.6%, 23.6% and 21.4% respectively. So yes, CBI is currently selling for a discount. Investors can buy a growing business with a backlog of ~30 billion for a decent price. I urge investors who do buy CBI, to buy for the long haul. Long term investors will be rewarded holding onto this name.

Risks

Currently the macro environment is not a good playing field for building contractors at this time. CBI may be at risk for cancellations or hold ups on its projects that it is currently working on. If this does occur backlog will be adversely affected and CBI will need to announce negative guidance for its revenue and earnings going forward. The stock price will fall if the former happens.

A second risk is the debt situation that CBI controls. Currently CBI has a debt of 2.27 billion and a cash position of 347.02 million. They also have a debt/equity of 76.17. With an operating cash flow of 119.93 million and leveraged free cash flow of -256.30 million, there may be trouble waters for investors of CBI in the future. Currently the debt situation and negative leveraged free cash flow problem does not bother me due to the super high backlog.

Conclusion

CBI is a great business selling for a great price. They are undervalued on a few different metrics, and they have a huge backlog which will give the business cash to operate with in the future. Some of the top names in investing have been accumulating shares of CBI, for they have come to understand the undervaluation and the equity and the potential for cap gains in the future. There are risks with any investment, but sometimes the reward is greater than the risk. I expect that CBI will be trading north of $70 per share by 2016.

Disclosure: I am/we are long CBI.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.